Bloomberg’s Steve Matthews and A. Catarina Saraiva have a very interesting assessment of the economic data coming from the good old U.S.A. Their assessment is based upon various indices that track how well, or badly, the actual economic data is faring in comparison to market prognosticators’ (their word not mine) expectations.
One of their sources is Bloomberg ECO U.S. Surprise Index:
Another source is the set of Citigroup’s Economic Surprise Indexes for the world, which shows that the U.S. is most disappointing relative to consensus forecasts.
This assessment of economic data is relative to what the market was expecting. Let’s see how the data is performing in absolute terms. This is against the backdrop of the Fed’s potential actions in the near-future regarding the Fed Funds rate increase and easy monetary policies.
Employment – The Bright Spot
One bright spot is on the employment front. The unemployment rate has been on a consistent decline after peaking in 2010. The non-farm payroll is also steadily rising after the steep plunge in the aftermath of the financial crisis. The JOLTS Jobs Openings is good too.
The weak spots on the employment front are the average hourly earnings and the labor productivity. The year-over-year change in the average hourly earnings is not going anywhere since 2010. And, same is the case with labor productivity which shows more downward pressure than upward.
So, at least on the employment rate and number, the current Fed policies are bearing fruits and are reaching the target for one of its mandates. However, the average hourly earnings and productivity data casts doubt over the argument that the USA is reaching NAIRU (non-accelerating inflation rate of unemployment).
Lack-Luster PMI Data
PMI (purchasing manager index) is a good measurement of the economic health. The ISM’s (Institute of Supply Management) manufacturing index uses five major indicators – new order, inventory levels, production, supplier deliveries and the employment environment. The Non-Manufacturing index tracks economic data like ISM Non-Manufacturing Business Activity Index. It covers 60 sectors across the nation.
A reading of under 50 indicates contraction in the economic activities and above 50 reading means economic expansion. Since 2010, the composite manufacturing and non-manufacturing PMIs are indicating economic expansion, albeit not by much.
Prices – Imminent Inflation or Deflation?
One area where not much clarity is emerging is the inflation. The CPI and PPI data are not convincing enough that the economy is moving towards Fed’s stated inflation target of two percent.
Both CPI and PPI are hovering near the 0.0% year-over-year change. The core numbers, excluding more volatile items, are not heating up much too. Personal Consumption Expenditure index, Fed’s favored measure, is also not showing imminent inflationary pressures. The PCE is near zero and the core is also not rising.
Against, this back drop raising of interest rates will bely Fed’s claim to reach its inflation target and meet its mandate of price-stability.
Are Commodities Sending A Signal?
Various commodity futures are moving almost in synch to the downside except for the live cattle futures. Below are charts of some commodity futures on monthly-timeframe.
Goldman Sachs Commodity, which represents a basket of commodities, is sharply down since mid-2014. The hard commodities, like crude oil and copper, are good indicator of the industrial and economic activities. They are in a strong down trend. The agricultural commodities – wheat, cotton, coffee, sugar etc. – are also trending down. The chart for lean hogs futures is showing similar pattern. Only live cattle futures are moving upward.
The picture that these commodities are painting is that the deflationary pressures are real and that they are not the product of collapsing crude oil only.
Can Dollar Withstand a Rate Hike?
The dollar index is on a tear. It has gone parabolic due to multiple of reasons. One, the U.S. economy is doing much better than most of her trading partners. Two, central banks of many countries are either implementing QE or are cutting interest rates, actions that are weakening their respective currencies. And, three, the market is anticipating that the Fed will increase the base-rate in the near future.
The dollar index is at a stage that it may start to threaten the state of U.S economy. Its elevated level does not give much elbow room to Fed for rate hike. The 30-Years Treasury Yields are still in a down trend, which means that the market, too, does not think that the long-term rates are going to go up soon.